Can the Innovator Deepwater Frontier Tech ETF reverse its 2022 losses?

The Innovator Deepwater Frontier ETF is up by 11% in the past month. The fund, which invests in disruptive technology including AI and robotics, suffered in 2022, but top holdings Nu Holdings and CrowdStrike have seen strong recent gains. With inflation cooling, driving investor interest, the fund could experience further growth.

• Innovator Deepwater Frontier Tech ETF is up 11% in the past month.
• Brazil’s Buffett-backed Nubank sees gains of 53% and announces AI investments.
• Positive outlook for tech sector through 2023.

The Innovator Deepwater Frontier Tech ETF [LOUP] offers exposure to tech companies in both established and emerging markets.

The fund tracks the Deepwater Frontier Tech Index, a portfolio of disruptive technology companies spanning artificial intelligence (AI), autonomous and electric vehicles, robotics, fintech and virtual reality/augmented reality. It is led by tech analyst Gene Munster, managing partner at Deepwater Asset Management. Munster uses his expertise to select firms at the cutting edge of technology: so-called ‘frontier tech’.

The fund, which listed in July 2018, was known as the Innovator Loup Frontier Tech ETF until April of this year.

LOUP is up 5.2% over the past 12 months and down 15.4% over the past six, but in the past month it has rallied 11.3%.

The ETF has 30 holdings, and as of 30 May 68.32% are within the information technology sector, 17.82% are in industrials, 5.93% are in consumer discretionary, 5.23% in financials and 2.71% in communication services. US companies account for 67.39% of the fund’s holdings, followed by the Netherlands (7.95%), Brazil (5.23%) and South Korea (4.71%).

Key players

The fund’s top holding is cloud security firm CrowdStrike [CRWD], which makes up 5.30% of total holdings. The Texas-based company is the world’s third-largest cybersecurity specialist after Palo Alto [PANW] and Fortinet [FTNT].

CrowdStrike’s share price is down 7.6% in the past 12 months, but has jumped 31% in the past six, and 29.7% in the past month. CrowdStrike reported positive fourth quarter results in early March, with earnings per share of $0.47, a jump of 56.7% year-over-year, outperforming Refinitiv analyst expectations of $0.43.

The fund’s second-largest holding as of 30 May is Brazilian digital banking platform Nu Holdings [NU], which makes up 5.23% of the fund’s total assets. The company is the parent of Warren Buffett-backed Nubank and has approximately 80 million customers. Most of its client base is in Brazil, but according to CEO David Vélez at an event commemorating Nubank’s 10th anniversary in May, the company could be looking at US expansion in the next decade.

Velez also said investments in AI were a “great priority” for Nubank, highlighting plans to expand its use within the company. “Five years from now you’ll be talking to Nubank in your self-driving car”, Reuters reported him as saying.

Shares in Nu Holdings have soared 68.5% in the past year, 52.6% in the past six months and 26.7% in the past month alone.

Outlook

Skyrocketing inflation and interest rate increases battered the technology sector last year. As a result, many investors shifted away from high-growth tech stocks.

However, with inflation slowing, the Innovator Deepwater Frontier Tech ETF looks set to benefit as investors return to the sector; in April US inflation saw its lowest level for two years, at 4.9%.

In January, Fidelity International forecast automation and AI would be the biggest forces disrupting tech in 2023; both of them are areas LOUP is focused on.

In short, analysts are generally optimistic that the tide is turning for tech. However, when it comes to broader gains, chief cross-asset strategist at Morgan Stanley Andrew Sheets pointed out in April that the S&P 500's rise in 2023 has been reliant on just three names: Apple [AAPL], Microsoft [MSFT] and Meta [META].

For now, the Innovator Deepwater Frontier Tech ETF says it is seeking “future FAANGs” — the next Facebook, Apple, Amazon [AMZN], Netflix [NFLX] and Alphabet [GOOGL] — as it invests in the newest wave-making technologies.